Why it is Dangerous to Take a Loan to Invest in the Stock Market
Nowadays, with everyone looking for multiple income streams, investing and saving in the stock market is an attractive means to grow your money. But as the cliche saying goes, you have to have money to make money, but this isn’t always true.
For this reason, many folks who don’t have heaps of money saved and are eager to invest weigh the benefits and risks of taking a loan to invest in the stock market. The term for this is leveraging, which operates under the assumption that since the returns on the investment will be higher than the cost of the loan, it’ll be easy to pay back the loan while still making a profit. In some cases, they even approach virtual loan companies in the hope of getting a quick online loan approval to pursue their investment in the stock market without paying attention to the terms and interest rates of these loan facilities.
This may seem like the perfect solution to successfully invest in the stock market, but it’s extremely dangerous, and taking a loan to invest in it should be avoided. Here’s why.
Stocks Don’t Always Perform as Expected
Investing in the stock market is a risk with no guarantees, albeit a calculated one. If you buy the wrong stock and it delivers negative returns, you’ll lose money and then be liable to repay the loan, interest, and fees out of your pocket.
You’re Liable for the Interest and Fees
Loans come with interest and fees, and if the loan you choose has a high interest rate, it’s a bigger risk. If the profit is not large enough to cover the loan, interest, and fees with some money left over, the loan will end up costing more than the returns you’ll earn. So, it’s not worth taking the loan.
Stocks Need to be Invested for Longer than the Loan Term
Often, it takes a long time to reap the rewards of an investment. When you buy stocks, it’s advisable not to touch the investment for many years so that it has time to grow.
Your loan will likely need to be repaid before the investment matures. So it does not make sense to borrow money to invest.
You’re Taking on More Debt
Whatever the reason you decide to take a loan, you end up accumulating more debt, and debt is expensive. By taking a personal loan to invest in the stock market, you’re committing yourself to pay off another bill every month until the total loan amount, including the interest and fees, is paid off.
While you may think you can afford it now, circumstances change. If there’s an adverse change in your income, it will be helpful to have one less bill to pay for.
How to Invest Without a Large Amount of Money
Many believe you need a lot of money to invest effectively in the stock market. It’s for this reason that people consider borrowing money to invest. While securing a loan online is easy, you should only apply for these loan types when there is an emergency.
You can start investing with a small amount of money and more as your wealth grows. It is important to be patient and only invest money that you won’t need to use soon in the future.
If you’re keen to invest but don’t have much money, consider the following:
Instead of waiting until you have lots of money saved, investing as early as possible is better and more profitable, even if you only invest a small amount. By investing early, you will benefit from compound interest and give your investment a long time to grow
Contribute to a 401 (K)
Many companies have a 401 (K), an investment account set up for their employees’ retirement. If you don’t have funds to invest in the stock market, you can contribute your 401 (K). Usually, your employer will also contribute to your 401 (K), which adds to your investment.
Micro-investing apps allow you to invest minimal amounts of money in stocks. The stocks that you buy are called fractional stocks, and there’s no minimum amount you are required to invest.
A fraction share means that even if you can’t afford to buy a full share, you can buy a fraction of a share. Depending on the app you use, a fraction share can cost as little as $1.
This allows you to diversify your investment, even if you have a small amount to invest. For example, if you only have $10, you can purchase ten fractional stocks – one in each company.
Exchange Traded Funds (ETFs)
ETFs comprise a collection of bonds, stocks, and other securities. This option is excellent if you want a diversified portfolio but don’t have enough money to invest separately in each stock.
As lucrative as it is to invest money for the future, you must do the following:
Pay Off Your Debt
Debt is expensive; the longer you take to pay back your loan, the more interest you will have to pay. If you have spare money and debt, use your money to pay off your loans and then invest.
There’s no point in investing money while the interest you owe grows, as it may be the case that the interest you will have to pay is more than the returns you earn on an investment.
Have an Emergency Fund
Before you invest money, make sure that you have an emergency fund so that you have access to money in an emergency or when you’re out of work. Money invested in stocks is not easy to access, so if you need money quickly, having savings in a savings account will be convenient.
Make Sure You Have Enough Insurance
While it is only a legal requirement to have liability insurance on your car, having both health and life insurance can be a literal life saver and ease the financial burden that comes with an emergency. Health insurance will allow you to seek medical treatment and take preventive measures to catch serious illnesses early. People often put off buying health insurance as they are young and healthy, but you can fall ill or become injured anytime.
Life insurance plans offer peace of mind knowing that your loved ones will be provided for when you die and will also cover the costs of your funeral and pay off your debts so that your loved ones aren’t burdened with them. It is best to buy life insurance when you’re young and healthy, as you will qualify for a lower monthly premium.
- Investopedia: Is It a Good Idea to Take Out a Loan to Invest?
- Lendingtree: Should You Use a Personal Loan for Investing?
- Gopaysense: Taking a Personal Loan to Invest in Stock Market: Pros and Cons
- Personalfn: Is it a Good Idea to Take a Personal Loan for Investments?
- Creditdonkey: How to Invest in Stocks with Little Money
- Investopedia: How to Invest When You’re Broke